College loan companies aren’t just ripping off students, they rip off taxpayers too.
By Robert Shireman
Need money for college, or to make payments on your student loans? Maybe you can wheedle a little out of Al Lord, CEO of the student loan behemoth known as Sallie Mae. Over the past five years, Lord has taken home a reported $280 million in compensation. That’s more money than 45 states make available in financial aid for all their undergraduate and graduate students.
If Lord was a true entrepreneur getting rich through innovation and risk-taking then we would have nothing to complain about. But Lord and the rest of the student loan industry are the opposite. They are classic “rent-seeking middlemen,” a term in economics for entities that use the power of the state to create low-risk, profit-making opportunities, while imposing the real costs and risks on government. Another term for this scam: corporate welfare.
In other words, Al Lord’s riches come not just from students’ payments on their loans, but also from our pockets as U.S. taxpayers. It’s a bad system. But it’s difficult to change, because rent-seeking middlemen make large campaign contributions and hire skilled lobbyists to press their case with the elected officials who can protect those ill-begotten gains.
That’s where you come in. The only way to beat corporate welfare is with active citizen participation demanding better government. Our non-profit web site, www.StudentLoanWatch.org, is one place to start. We launched just six months ago, when Congress was preparing to leave town without doing anything about waste in the student loan program. We released a report, and the drumbeat of letters, newspaper editorials, and leadership by student-friendly lawmakers led to a small step in the right direction. Congress closed one loophole, and some of the money that would have gone to middlemen was diverted to a much more useful purpose: forgiving student loans of teachers in high-poverty schools.
With that momentum, we have a real opportunity in this Congress to change the priority in financial aid from subsidizing banks, to helping students. Switching from government-guaranteed loans to the more streamlined direct loan program would save $9 billion in one year alone, based on figures in President Bush’s 2006 budget. That is enough money to double the financial aid budgets of all the states, or to increase the federal Pell Grant Scholarship to $5500 or more (it is currently $4050). President Bush has proposed an increase of $100, or 2.5 percent—hardly enough when state budget cuts have driven tuition up at double-digit rates.
In the current student loan system, colleges and universities can choose to participate in the direct loan program, which costs taxpayers much less to run. About one-fourth of all federal student loans are direct. But other than the psychic reward from doing the right thing, colleges have no incentive to choose the program that costs taxpayers less. A growing, bipartisan coalition in Congress aims to change that. Their proposal, the Student Aid Reward (STAR) Act, would allow colleges to keep half of the savings—and use it for financial aid—when they reduce taxpayer costs by cutting out the student loan middlemen. That would provide colleges with enough to increase aid to Pell Grant recipients by $1000, a nearly 25 percent increase.
Al Lord doesn’t need any more of our money. But there are millions of students and graduates who are struggling to pay their tuition bills or make those payments on their student loans. Let’s return federal financial aid programs to their original purpose: helping students, not subsidizing banks and Sallie Mae.
Robert Shireman, the founder of www.StudentLoanWatch.org, is a visiting scholar at the University of California at Berkeley’s Center for Studies in Higher Education.